WSJ: Why Your Home Is Not the Investment You Think It Is

[brewer12345]

I would think land might make a better investment, don't have the above extra fees, and
probably less downside.

Much harder to finance and a lot more volatile, from what I understand. But I would probably jump on land first, personally.

 

[wabmester]

But I would probably jump on land first, personally.

Whenever I think about buying land, I always remember that it's just a bunch of dirt unless I can find another sucker to buy it from me later. A bunch of dirt that comes with annual taxes and personal liability.

When you think about investing in real estate, remember Detroit. Nice houses and land transformed into worthless sticks and bricks on a bunch of dirt.

 

[brewer12345]

Whenever I think about buying land, I always remember that it's just a bunch of dirt unless I can find another sucker to buy it from me later. A bunch of dirt that comes with annual taxes and personal liability.

When you think about investing in real estate, remember Detroit. Nice houses and land transformed into worthless sticks and bricks on a bunch of dirt.

Yup. But I also think about:

- Land I could have bought on Vieques for a song that is worth megabucks now
- All the moolah dad made on his land speculations when we were growing up
- The family fortune built by DW's stepmother's family. They bought land outside of the city they live in and correctly guessed the path of development.

 

[wabmester]

Yup. But I also think about:

- Land I could have bought on Vieques for a song that is worth megabucks now
- All the moolah dad made on his land speculations when we were growing up
- The family fortune built by DW's stepmother's family. They bought land outside of the city they live in and correctly guessed the path of development.

Yeah, the land is just a token for supply and demand. That's why I like waterfront. The demand is always high, and they ain't making any more. Worst case, it's a nice place to camp out.

 

[Sam]

When you think about investing in real estate, remember Detroit.   Nice houses and land transformed into worthless sticks and bricks on a bunch of dirt.

Alternatively, remember SF, or NYC.  Come on, there's a balance.  Nothing is absolute good or bad.  It all depends on location, time, and circumtances.

 

[wabmester]

Alternatively, remember SF, or NYC. Come on, there's a balance. Nothing is absolute good or bad. It all depends on location, time, and circumtances.

Yup, kind of like stock picking. Sometimes stuff is cheap for a good reason.

 

[justin]

I don't know how unrealistic the $150,000 or $300,000 for remodeling really is. Over the course of 30 years, you're talking 2-3 full remodels to keep your place "updated".

What's the difference in a 12 year old outdated kitchen and the original 30 year old circa 1977 outdated kitchen? Not much except the white appliances instead of the avocado/gold appliances. If it isn't new, it's old.

After 10 or 15 years, your remodels you did will need to be re-remodeled to keep up with current trends. Today you can remodel, but in 2017, when you go to sell your house, it will have kitchens and bathrooms bordering on outdated. Granite countertops may be sooooo 2000-ish by then. Who knows? Intricate tilework/stonework bathrooms may be out in favor of stainless steel/modern bathrooms.

1977 wood paneling? Gotta go. 1980's era wallpaper - gotta go too.

I did find it surprising that the article included massive maintenance expenses of $300/month, AND the huge capital improvement expenses.

 

[CCdaCE]

last year i was running numbers in my head of buying the cheapest home in the NYC area i can find with a good sized lot and in a good neighborhood. Find something with 30 year old kitchen and bathroom. then over 15 years or so gut it out and remodel with top of the line stuff. $400,000 house will probably cost $150,000 to remodel. i would do this mostly for myself

<snip>

Yeah, that's what I'm talking about... spending fractions of what a home is worth not multiples.

I did find it surprising that the article included massive maintenance expenses of $300/month, AND the huge capital improvement expenses.

Yep, double whammy, to me.

I'll shut up now.

-CC

 

[eridanus]

Are those inflation adjusted numbers? Spending $20,000 in 1975 is a lot different than spending $20,000 in 2005.

 

[CCdaCE]

Are those inflation adjusted numbers? Spending $20,000 in 1975 is a lot different than spending $20,000 in 2005.

No.

From slightly above the 2nd table....

"The Costs of Home Ownership" table is a simplified rundown on a typical single-family home -- a house that was bought for $50,000 in 1977 -- based on national appreciation rates as reported by the Office of Federal Housing Enterprise Oversight (OFHEO). Included are modest estimates of other home-owning costs (not adjusted for inflation). To keep things simple, there are no transaction costs, no additional borrowing to finance improvements and no refinancing costs, all of which would drive the expenses even higher. It's not a pretty picture.

Bold/underline emphasis mine.

So, that makes the comparison even worse if the comparison is not weighted for the "time value of money" or inflation or both.

Apparently, I can't shut up.

-CC

 

[tryan]

Another gross miscalculation is the fact that the renovations are assumed to add NO value to the property. Try selling your 1950 era ranch with NO upgrades ... good luck.

Of course the upgrades added re-sale value. I tell people they'll get HALF the money back. Most do not like hearing that (they believe the contractors who say 100-125% of the rehab costs are re-cooped) ... just been my experiance.

 

[chinaco]

Just a thought.... heck maybe half thought through at that.


I have wondered if one would net out better-off over the long haul if they buy new and sell every 10 years... before things begin to wear out. The cost of the sale/buy can be the commissions. Plus there is the hassle and cost of moving. (ignoring other important issues like location, etc... that might need to be factored in to the decision)

Since kitchens and baths cost a fortune to refurb, plus new roofs, etc... It seems like there might be some advantage to doing so. I have not run any hypothetical numbers. But it might be worth a look.

We are going to down-size in about 4 years. Our house will be about 15 years old. It will still have curb appeal and be new enough that the kitchen, bathrooms, roof, etc.... are still in good shape.

Any thoughts?

 

[maddythebeagle]

Just a thought.... heck maybe half thought through at that.


I have wondered if one would net out better-off over the long haul if they buy new and sell every 10 years... before things begin to wear out. The cost of the sale/buy can be the commissions. Plus there is the hassle and cost of moving. (ignoring other important issues like location, etc... that might need to be factored in to the decision)

Since kitchens and baths cost a fortune to refurb, plus new roofs, etc... It seems like there might be some advantage to doing so. I have not run any hypothetical numbers. But it might be worth a look.

We are going to down-size in about 4 years. Our house will be about 15 years old. It will still have curb appeal and be new enough that the kitchen, bathrooms, roof, etc.... are still in good shape.

Any thoughts?

well...sure....Seems like most places that I have ever looked at needed some "improvment"...all the ones that were reasonably updated werent for sale...I wonder why I figure any improvements to my place is simply for my enjoyment over the years...I would probaby think much differently if I wasnt planning to be here longer term....

By the way, I enjoy Tryan's and other RE gurus comments on all of these issues....good stuff...

 

[Andre1969]

Lessee...

I've been in my house about 3 1/2 years now. Here's a quick, off-the-top-of-my-head, rundown of the expenses I've incurred...

$50: materials to re-stain hardwood floor in one of the bedrooms
$50: materials to fix a broken window (window pain, the little metal triangles that hold it in, window putty, wire for the pulleys, etc
$20: parts to replace the innards of the toilet
~$250: call to have the plumber come out and replace the sink drainpipe
~$250: call to have the plumber come out and fix a leaky pipe to the water heater
$5.00: roofing tar to fix a rotten, leaky spot in the roof. I was able to scrounge around and find everything else I needed: shingles, plywood, nails, flashing, etc, so I only had to buy the tar.
~$500: materials to replace about 56 feet of stockade fence. I put it up myself. Included 4x4 posts, 6x8 fence sections, heavy-duty screws, and 2x10 boards across the bottom to make the fence taller
~$90: 3 cubic yards of topsoil, delivered by myself, using my pickup truck (3 separate trips)
$240: new exhaust system, when said topsoil caused truck body to sag far enough to pinch the exhaust system between the bed and rear axle, causing it to break. First, the tailpipes fell off. Then the muffler. It was rusty anyway, but those topsoil loads definitely sped up the replacement. A cubic yard of topsoil weighs about 2700-2800 pounds. There's a sticker in the truck's glovebox that says "bed capacity: 864 pounds". Note to self: don't do that again!
$50: had to have an electrician I knew come out and replace a breaker in the circuit box
$28,000: new 24x40 4 car garage, plus roughly 200 feet of gravel driveway, plus running wiring roughly 150-175 feet from the house to the garage, underground.

I'm sure that I've missed a few minor things here and there, so figure maybe $31000 tops. For 3 1/2 years. So yeah, once you include that big garage I had built, I'm coming in at around $8850 per year!

 

[tryan]

$28,000: new 24x40 4 car garage, plus roughly 200 feet of gravel driveway, plus running wiring roughly 150-175 feet from the house to the garage, underground.

Bet you gain ALL of this one back on re-sale! 8)

There are some rehabs which give back more than they cost (e.g. fireplace addition is another in most markets).

 

[kcowan]

...Since kitchens and baths cost a fortune to refurb, plus new roofs, etc... It seems like there might be some advantage to doing so. I have not run any hypothetical numbers. But it might be worth a look.

We are going to down-size in about 4 years. Our house will be about 15 years old. It will still have curb appeal and be new enough that the kitchen, bathrooms, roof, etc.... are still in good shape.

Any thoughts?

I knew some couples who would buy a new house every 5-8 years and get the "pop" that comes from buying pre-construction, pre-planting and personalization on each purchase plus avoid the maintenance issues you mentioned. The only expense they ever had was cleaning and painting.

It can be lucrative IF you can get your heads around the hassle.

 

[bright eyed]

tryan i think there is a difference between people w/ avg means who "buy" their house (that they live in) and "consider" it part of their overall worth/investment plan - then people who "invest" in real estate...

i also think that even though you might have made a "profit" by buying cheap at some point and getting a good price when you sell - doesn't that mean that overall the market is steep so whatever you buy will also be costly? cash in cash out right? i think that is the clincher part - unless you do the California cash out and move to other states to really see the "profit" from your house...

i'm happy w/ our decision to rent for now - our biggest problem will be not having leverage to "buy" something until we can save/invest/earn enough for a decent down payment. but then again we just might stay here forever!

in my case, renting is way cheaper for us - it's my parents house so we don't pay market rates

buying in our neighborhood - houses are about $600-800k (our parents bought for $200k about 22 years ago)...so our mortgage would be well over $3k per month - we pay half that.

so our case is not the norm...i think houses rent here for about $2500-$3000/month. mostly for the good schools.

have noticed a lot of "for lease" signs recently ...

 

[wabmester]

I knew some couples who would buy a new house every 5-8 years and get the "pop" that comes from buying pre-construction, pre-planting and personalization on each purchase plus avoid the maintenance issues you mentioned. The only expense they ever had was cleaning and painting.

It can be lucrative IF you can get your heads around the hassle.

I loved this recent housing bubble. Imagine somebody buying three high-end houses at the start of the bubble, getting double-digit appreciation on each one, selling one every two years and then moving into one of the others, and taking the full $500K tax-free cap gains every two years for six years running.

We didn't nail it quite that well, but I still loved the bubble.

 

[FIRE'd@51]

I loved this recent housing bubble. Imagine somebody buying three high-end houses at the start of the bubble, getting double-digit appreciation on each one, selling one every two years and then moving into one of the others, and taking the full $500K tax-free cap gains every two years for six years running.

This is somewhat related to something I have often wondered about. Once one has a 500K unrealized gain on a primary home, should one sell it and make a lateral move just to re-establish the basis?

 

[wabmester]

Once one has a 500K unrealized gain on a primary home, should one sell it and make a lateral move just to re-establish the basis?

If one has another home that has also appreciated, definitely.

Otherwise, it does make financial sense to take the free gain, but you have to ask yourself if saving the marginal tax expense on the gain over $500K is really worth the pain of moving.

 

[ERD50]

This is somewhat related to something I have often wondered about. Once one has a 500K unrealized gain on a primary home, should one sell it and make a lateral move just to re-establish the basis?

If one has another home that has also appreciated, definitely.

Otherwise, it does make financial sense to take the free gain, but you have to ask yourself if saving the marginal tax expense on the gain over $500K is really worth the pain of moving.

wab, I guess I'm dense, but I'm not getting the 'smiley' on the first part.

What does 'another home' have to do with it? If I understand it, you don't pay cap gains on the first $500K of gains of a primary residence. As Fire'd@51 put it, it seems that you could avoid cap gains tax completely by selling as your gain approached $500K, and make a sideways move. You could keep taking that $500K exclusion on any number of homes sequentially, correct?

Whether it is worth it or not must be considered of course. A $600K gain would result in $15K taxes; a $500K gain, $0 taxes. I guess you could estimate the expected annual increase in your home and look at the cap gains tax as an annual expense. Say you had a $800K house with $500K gains. Say you anticipate the value increasing 5%/year. $40K/year average increase is 'costing' you $6K/year in cap gains tax.

Considering the cost and hassle (excitement for some?) of moving, does not seem worth it offhand. But, if you were considering moving anyway, and you are approaching the $500K exclusion, it could add a bit of motivation to time your move.

IIRC, I need to adjust my cost basis by the amount I deferred from previous sales (when the rules were that you only pay cap gains on the amount you take *out* of the primary residence - buying 'up' incurred no cap gains tax). I probably won't hit $500K gain until the kids are all moved out. We may decide to downsize then, so there is a chance this will all fall in line for me. Nah, they will change the rules by then!

-ERD50

 

[mb]

This is somewhat related to something I have often wondered about. Once one has a 500K unrealized gain on a primary home, should one sell it and make a lateral move just to re-establish the basis?

If one has another home that has also appreciated, definitely.

Otherwise, it does make financial sense to take the free gain, but you have to ask yourself if saving the marginal tax expense on the gain over $500K is really worth the pain of moving.

We now have about a $500k gain in our house. I wouldn't even bring it up with DW. I know what the answer would be

MB

 

[tryan]

tryan i think there is a difference between people w/ avg means who "buy" their house (that they live in) and "consider" it part of their overall worth/investment plan - then people who "invest" in real estate...

i also think that even though you might have made a "profit" by buying cheap at some point and getting a good price when you sell - doesn't that mean that overall the market is steep so whatever you buy will also be costly? cash in cash out right? i think that is the clincher part - unless you do the California cash out and move to other states to really see the "profit" from your house...

I am probably in the minority with this believe but here it goes .... volitile markets have long downward turns; housing is not exempt. IMO, we all live thru 5-7 housing "cycles" where huge buying opportunities are presented at the "bottom". And huge selling opportunities are available at the top. The size of the opportuinty depends on the volitility of your market.

Point being, no need to "move to other states" if you're already in a high volitility market. Just position yourself to take advantage of the long term cycle ... and have the persistence and determination to "wait".

 

[wabmester]

wab, I guess I'm dense, but I'm not getting the 'smiley' on the first part.

What does 'another home' have to do with it? If I understand it, you don't pay cap gains on the first $500K of gains of a primary residence. As Fire'd@51 put it, it seems that you could avoid cap gains tax completely by selling as your gain approached $500K, and make a sideways move. You could keep taking that $500K exclusion on any number of homes sequentially, correct?

Sorry, that was sort of a self-satisfied smiley. If you already own another house that you'd consider moving into, then it's virtually a no-brainer to take the tax-free gain on the first home and position yourself for another tax-free gain with the gains already embedded in the second home.

I wouldn't recommend it as a strategy, but the current tax code does seem to encourage this serial mover strategy, and you can optimize it by buying two houses per move. Live in one, rent out the other, switch, sell, and repeat.

In reality, the downsides of moving and Realtor(TM) transaction costs offset the tax savings. But maybe in the next boom, cap gains taxes will be higher and the Realtor(TM) monopoly will have tumbled down, and house hopping will be a useful strategy.

 

[Finance Dave]

Must be the midwesterner in me. I still say if you're droppin' $50-70k into a $50-300k house, you're nuts. But, it's your life, your money, etc. If renovation is something you're doing to sell the place, and that is seen as necessary, then it's a different story. If I have to dump $50k+ into a house to get you to consider buying, now THAT is just a crazy MARKET.

Right now, I'm putting $2k into a bathroom.

Ahhh, real estate.

-CC

I agree...midwest here too. Another point to make about new vs. existing purchases is that some commodities have increased dramatically in price...such as copper (wiring and plumbing if you have copper plumbing). In addition, there are many "up front" costs for new construction...blinds, landscaping, appliances, getting a yard started, privacy fence, etc. Sure, when buying used, sometimes you still have these...it's hit and miss. I know when we moved into our new construction house, we spent a ton on blinds, curtains, landscaping, epoxy coating on garage floor, and all the little "fix up" things to get it looking nice (for instance, that brown wastebasket you had no longer matches the new green decor). Some of these things are for comparing buying new to buying used, and some are for comparing buying anything to staying put.

Dave